China's Defense Industry on the Path of Reform

Chinas defense industry has undergone a dramatic transformation over the past decade. Fundamental reforms in central government organization and policy, the operations of defense enterprises, and the flow of international capital reveal a new paradigm on the part of the Chinese leadership. As a result of these changes, the historical critique of Chinas defense industry as clogged with redundancy and inefficiency, and lacking access to capital and advanced technology is no longer accurate. Building upon the findings of a 2005 RAND report entitled A New Direction for Chinas Defense Industry, this report analyzes recent reforms in Chinas defense industrial base and their effectiveness. It adopts the sector-by-sector approach introduced in the RAND study to account for significant variation across the different sectors aviation, aerospace, nuclear, shipbuilding, electronics, and ordnance. The chapters in this report assess the tremendous progress Chinas defense industry has made since 1998 by arguing that four main factors have determined its success and define the leaderships new approach to modernization More funds for weapons acquisition Spin-on benefits from the commercial economy Integration into the global research, development, and production chain, which provides access to foreign technology, know-how, and capital and Fundamental reforms building on the Four Mechanisms of competition, evaluation, supervision, and encouragement introduced in 1998. These factors provide a framework for assessing the effectiveness of reforms and the extent to which they are enabling China to strengthen its indigenous capabilities. At the foundation of this framework is a principle put forward by the Sixteenth Party Congress in 2003 Yujun Yumin Locating Military Potential in Civilian Capabilities. The principle calls for building a civilian sector capable of meeting the PLAs needs and the coordinated development of the civilian and defense economies.